Oregon May Provide Model For Restructuring Medicaid In Alabama

This story comes from our partner Stateline, the daily news service of the Pew Center on the States.

MONTGOMERY, Alabama – Just two states have governors who are physicians. Democrat John Kitzhaber of Oregon is an emergency room doctor. Republican Robert Bentley of Alabama is a dermatologist. Their states may have little in common, but the medically trained governors have embraced similar Medicaid reforms.

Over the decades, Oregon has built a relatively generous Medicaid program and has been a bellwether for health policy experimentation. Alabama, like most other southern states, has run a barebones program with few optional benefits.

Launched last year, Oregon’s current Medicaid plan relies on local health care organizations to coordinate all forms of health care, from acute medical services to mental health and dental care, all in an effort to lower costs and improve health. Basically, the local entities, which may be headed by a hospital, physician group, community service provider or a managed care organization, are given a budget and challenged to beat it. If costs exceed the budget, the organization takes the loss.

Alabama lawmakers will soon consider a proposal from Bentley for a Medicaid overhaul based in part on Oregon’s groundbreaking “community care organizations.” Although Bentley has said he would not support an expansion of Medicaid “under its current structure,” the expected reforms are seen as paving the way for a possible expansion as early as 2015.

Last October, a commission established by Bentley began researching ways to restructure the state’s Medicaid program to make it more efficient. The group concluded that Alabama should follow Oregon’s path. “It will be a heavy, heavy lift,” says state health officer Don Williamson, who headed the group. But he said the overhaul is necessary if the state is ever going to expand Medicaid. Otherwise, he said, “we will find ourselves with a program that simply collapses under the weight of the expansion.”

The Managed Care Option

What the commission ruled out was privatizing Medicaid. While most other states, including Oregon, have expanded their use of commercial managed care in recent years, Alabama and a few other states have yet to start.

“Providers would not have supported the state just washing its hands and turning the entire program over to a commercial managed care company,” says Mike Horsley, CEO of the Alabama Hospital Association and a member of the governor’s Medicaid advisory commission.

In general, Alabama health care providers are concerned that managed care organizations would cut payments to doctors, hospitals and other providers in order to hit cost targets under a state contract. They also worry that the companies could break their contracts or fail to renew if they’re unhappy with their profits.

“We looked around the country and saw states that had been in managed care and made a mess out of it,” says another commission member, Stan Hammock, vice president of the University of South Alabama hospital system. “It’s had mixed results.”

Legislators, however, may have different thoughts on managed care. “Everyone expects the legislature to be focused on real and tangible savings,” says Toby Roth, a health care industry lobbyist. One of the primary reasons for privatizing Medicaid is that a private company takes over all of the management and is contractually required to hit an overall cost figure that is lower than what the state on its own had spent.

According to the commission’s report, a group of managed care organizations represented by United Healthcare said it could do just that. The group committed to reducing Alabama’s Medicaid costs by even more than the commission had calculated it would save with a regional care approach. Managed care companies said they could reduce current state Medicaid spending by as much as 4 percent over five years; the state-run regional plan is projected to save up to 3.5 percent.

The companies also promised to deliver a new Medicaid plan for everything but long-term care that would be ready to run statewide by 2014. “Regional care organizations,” the name Alabama has given its Oregon-like local health groups, likely would not be ready to operate statewide until 2015. Still, the commission opted for the Oregon plan because hospitals, pharmacies and other providers said they would not support a managed care plan.

The governor’s proposal may split the state into regional care and managed care areas as a way to test both concepts, administration officials say. Hospitals and consumer advocates are urging Bentley to accept the commission’s recommendation to pursue regional care organizations throughout the state.

The Expansion Debate

Originally mandatory for states, the Medicaid expansion outlined in the Affordable Care Act was made optional by the Supreme Court last June as part of a decision that otherwise upheld the controversial law. For states that choose to expand, the federal government will foot the entire bill for new enrollees for the first three years. After that, the state’s share gradually increases to 10 percent of the cost.

After last year’s elections, Bentley joined about a dozen other Republican governors in announcing he would not support the expansion. Politically opposed to the health law, most GOP governors argued that even 10 percent of the cost in the future was too much for their budgets.

Since then, however, GOP governors in Arizona, Michigan, Nevada, New Mexico, Ohio and Michigan have broken ranks, approving the Medicaid expansion. It is now up to their legislatures to decide whether they want to go along with it.

In many ways, Alabama’s deliberations over whether to expand Medicaid are similar to those in other Republican-led states. Consumer advocates and health care providers want the state to take the federal money to boost the number of people with health insurance. Republican opponents of the health law, on the other hand, argue the expansion is too costly for both states and the federal government.

But much of the debate in Alabama’s legislature this session is expected to focus on the state’s Medicaid budget and its peculiar financing mechanism for hospitals. Most Republican lawmakers simply want to rein in the current Medicaid budget and cap its growth in the future, says Roth. Expanding Medicaid is not on the agenda.

Although Alabama’s overall share of Medicaid costs is about 31 percent, the federal government nine years ago approved a hospital financing mechanism that effectively makes the state’s general fund share of costs only 9 percent. A combination of taxes levied on private hospitals and federal subsidies to public hospitals has meant that no state revenue is spent on Medicaid’s share of hospital use. No matter how high the costs, the state pays nothing.

As a result, Alabama has had no fiscal incentive to improve the efficiency of health care delivery in the state, which can be done only by reducing hospital admissions. The flip side is that any improvements the state might make, such as following Oregon’s lead, would have little effect on the state’s budget.

Whatever type of reform the state adopts, a change in the way hospitals are financed will be an essential element, Williamson says. “There is no disagreement on that.” But Alabama needs the cooperation of its hospitals to make the change. That’s why Williamson and others argue that a move to statewide managed care is not a viable option.

Beyond Medical Services

Oregon’s community care organizations provide much more than medical services. The groups combine comprehensive medical care with preventive care, dental care and behavioral health and substance abuse services. They also help people navigate the health care system and ensure patients have access to any other local support services they need — all under one fixed fee per customer.

Kitzhaber likes to use the example of an elderly woman who lived alone and suffered from congestive heart disease. She was repeatedly rushed to the emergency room whenever the weather heated up. Instead of paying thousands of dollars for each visit, community providers came up with a better idea. They bought her an air conditioner.

The idea is to make sure all patients get the services they need to either stay healthy or minimize the complications of acute and chronic illnesses. It’s a tall order, but so far it seems to be working in Oregon. It is too soon to say whether the experiment will lower Oregon’s Medicaid costs, but a preliminary review of the system in one community has shown marked declines in emergency room use and hospital admissions.

When Alabama’s Hammock talks about how he sees his two hospitals in Mobile fitting into such an arrangement, he sounds like a true believer. “We’ll need to focus on people with the most complicated health problems first,” he says. “The tricky part will be getting providers to move from a competitive model to a collaborative model.”

Even though hospitals and consumer advocates say they would prefer to see the state expand Medicaid in 2014, they are backing the commission’s reform plan for now. It took a fiscal crisis and the Medicaid expansion debate to get to this point. But leaders on both sides of the aisle say a revamp of Alabama’s Medicaid system is long overdue.

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